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NPOs Can Still Get CARES Act Employee Retention Credit
NPOs Can Still Get CARES Act Employee Retention Credit

The impact the COVID-19 pandemic had on nonprofits and tax-exempt organizations (TEOs) was unexpected and unprecedented. To prevent a mass unemployment crisis and to provide aid to employers, the federal government included an Employee Retention Tax Credit (ERC) in the Coronavirus Aid, Relief and Economic Security Act (the CARES Act).

Nonprofits can be considered an eligible employer for the CARES Act ERC. TEOs typically are not eligible for federal tax credits, however, the CARES Act ERC presents a rare opportunity for organizations to receive tax credits. This is a rare opportunity because the ERC, which is refundable, is taken against employment taxes.

The CARES Act made its way through Congress quickly in March 2020, and there is no legislative history or formal regulatory guidance from the Internal Revenue Service (IRS), leaving a lot of gray areas and unanswered questions for employers. As the pandemic continued, Congress updated the legislation and expanded and enhanced certain provisions of the ERC. In December of 2020, the Consolidated Appropriations Act was passed which extended the credit period to June 30, 2021 and increased the maximum ERC available to employers. 

A few months later, in March 2021, the American Rescue Plan Act extended the credit period through December 31, 2021. A follow-up piece of legislation, the Infrastructure Investment and Jobs Act 2021, removed the fourth quarter of 2021 from the credit period, however, pending legislation, the ERTC Reinstatement Act, would potentially add the fourth quarter of 2021 back. 

To be considered an eligible employer, a nonprofit must pass either the Gross Receipts Test (GRT) or the Government Orders Test (GOT). A common misconception is that an organization must pass both tests.

A nonprofit is eligible under GRT if during the calendar quarter in question it experienced a significant decline in gross receipts. In general, the amount of decline required under this test for eligibility in 2020 is 50% when compared to the same quarter in 2019, and the amount of decline required for 2021 is 20% when compared to the same quarter in 2019. 

Alternatively, a nonprofit employer could be eligible for the ERC under the GOT if its operations were fully or partially suspended during the calendar quarter due to orders from an appropriate government authority that limited commerce, travel or group meetings due to COVID-19. Those orders could come from federal, state or local governmental bodies. 

One common example of a situation which could constitute a partial suspension of operations is governmental restrictions on mass gatherings and social distancing mandates preventing in-person fundraisers and certain events. 

TEOs might be eligible under both the GRT and GOT. Generally, gross receipts in the case of a TEO includes all amounts received during the year (including contributions, grants, and gifts) without reduction for the costs of collecting or raising those amounts. 

Many nonprofit leaders remain unaware of the ERC and their possible eligibility, and it is important to note there is still time to claim the ERC. A nonprofit eligible employer could be able to claim the CARES Act ERC for a total of seven (7) quarters, starting March 13, 2020 and ending in September 30, 2021, depending on each organization’s specific facts and circumstances. 

Because the CARES Act is complex and requires in-depth knowledge to determine eligibility, you might think about consulting with tax credit experts.

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Ashley Hogsette is chief legal officer at consulting firm Synergi Partners in Florence, S.C. Her email is [email protected]